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Broken link in the agricultural supply chain

In the season of elections animal spirits rule. India’s equity markets have been ebullient for some time now. Spurred by a robust inflow of foreign investment capital, markets have reacted favourably. A lot now depends on the ability of the next government to enact meaningful structural reforms, especially in a sector such as agriculture that requires modernization. Will things turn out as expected?

Reforms in agriculture are important for more than one reason. Apart from the huge number of people it employs, fortunes of the retail sector depends on what happens in farms. Infact, FDI in retail and modernization of agriculture are two faces of the same coin.

As far as the economic implications of retail FDI go, attention has been focused exclusively on its impact on the livelihood of local retailers, who are likely to take a hit on competition from the likes of Wal-Martand Tesco. The ability of local retailers to organize into an effective lobby voicing their concerns could perhaps explain this. The actual implications of retail FDI, however, are likely to extend well beyond the narrow confines the debate has been limited to.

Indian farmers are likely to be the biggest beneficiaries of a competitive retail sector, given the imbalances in the agricultural produce market. Restrictions imposed by the Agricultural Produce and Marketing Committee (APMC) Act have effectively barred them from selling their produce at remunerative prices, restricted the size of their potential market, and, most importantly, prevented competitive bidding for the produce.

Currently, the agricultural supply chain is monopolized by powerful middlemen and politically influential local groups who control mandis or wholesale markets—resulting in a huge wholesale-retail price gap. There could be little doubt that allowing FDI in retail, when complemented by scrapping the APMC Act to open up the market for wholesale procurement, will help farmers command better prices for their produce. It is likely to lead to better farming returns, increased production and lower prices for customers.

Insufficient investment in cold storage and other supply chain facilities is another major worry, but something that has been ignored for long. A study by the Associated Chambers of Commerce and Industry of India (Assocham) and Yes Bank points to the enormous shortage of warehousing capacity in India, estimated at around 35 million tonnes. The food grain wastage owing to the shortage is estimated at around 20% to 30% of the total harvest.

The reasons are not hard to find. India’s agricultural storage infrastructure was created at a time when food grains such as rice and wheat formed a disproportionate part of food consumption. It was assumed that dietary habits would remain constant for the foreseeable future. It made sense when rural incomes did not rise significantly. Even in urban areas, where food consumption was more diversified, demand for food grains remained high.

That pattern has changed dramatically in the last decade. With rising urban and rural incomes, food consumption has diversified greatly. Milk, eggs and other protein-rich diets are now a significant part of the food basket. A great part of food inflation is protein inflation, as the demand for these foodstuffs greatly outstrips supply.

Changing this requires fixing the broken supply lines with agricultural markets. For example, transporting milk to cities does not require food storage facilities but chilling plants and fleets of trucks equipped with cooling units. These investments need FDI in agricultural markets that cannot be made by governments not only due to financial constraints but also due to lack of expertise.

Given the gains that farmers and—more importantly—consumers could potentially reap, reforms aimed at strengthening the agricultural supply chain will obviously be welcome. However, reforms uprooting today’s deeply entrenched special interests will be hard to come by unless the political weight of farmers and consumers is combined for better results.